Flood Modeling: A Key Property Market Challenge

Capacity awaits for when flood can be more adequately modeled.

As if putting a neat bow on all the major themes of the Advisen Property Insights Conference June 4 in New York, Robert Schimek, senior vice president and CEO Americas said that “within the next few weeks, AIG will announce a new risk management center of excellence in association with a major university that will be centered on engineering and technology.”

Robert Schimek, senior vice president and CEO Americas, AIG

Although the event had its usual depth and breadth, each panel and speaker seemed to focus on different perspectives of the same essential concepts: Big data and third-party capital markets are forcing an industry that has historically sought more information and funding to restructure itself to be able to manage surpluses of both.

The AIG center is expected to provide insight on how to do that. No further details were available from the company at press time.

“There are billions of alternative-capital dollars on the sidelines just waiting to get in,” said Cory Anger, managing director of GC Securities and global head of ILS origination and structuring at Guy Carpenter.

“Just 1 percent of the pension funds is about the current size of the reinsurance market today. And that does not even count sovereign wealth funds and family offices.”

She also noted that this looming capital is becoming available at a time when several markets are in need of fresh capacity. The flood market in particular, Anger cited, “has a huge under-funded problem. We are at a very big turning point in how we deal with this. It is a sea shift as rate adequacy is moving up slowly. We are seeing increased privatization of risk that had been centralized.”

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While that might seem like an unmitigated blessing, Advisen CEO Bill Keogh, moderator of the CEO panel that closed the conference, asked the panel if reinsurance was still viable in the face of burgeoning alternative capital, and if property catastrophe margins were gone forever. Both unintended consequences.

Byron Ehrhart, CEO of Aon Benfield Americas and chairman of Aon Securities, assured the packed room that “reinsurance is still viable and is becoming more competitive.”

And Anger, of GC Securities, offered hope that “prop cat margins can get to where baseline pricing is more reliable so it can be depended on as a source of revenue.”

As with big money, big data is both a boon and a burden. “Analytics is exciting stuff,” said Thomas Lawson, president and CEO of FM Global.

“But we have been collecting data for 180 years and we know that the strength of your model is only as good as your data. And your data is only as good as your premise.”

Lawson also made a point of addressing a concern that several large owners had raised throughout the conference: the reluctance of underwriters to pay property claims in cases when the damage could be traced to some type of cyber threat, or to write coverage for data and systems.

One reason for that reluctance is that cyber security remains difficult to evaluate in traditional underwriting. So just as a theft claim would not be honored if a door were left unlocked, some carriers have been unwilling to pay for cyber losses if proper safeguards were not in use.

“You can’t keep people out of your system. But you can know when they get in, and have ways to get them out.” — Thomas Lawson, president and CEO of FM Global

“We have known that data is property for some time,” said Lawson.

“A loss is a loss, loss of data, or denial of service. The same as if a gas turbine explodes because of a virus or because of a mechanical failure.”

On cyber security Lawson added, “the current mentality is that you can’t keep people out of your system. But you can know when they get in, and have ways to get them out.”

Taking an active role, Schimek said that AIG has been investing in new capabilities to provide insights on dark networks and insureds’ vendor networks.

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“There is a real risk to physical property from a cyber attack.” Far from being a problem, he exhorted, “this is a great opportunity for the industry.”

The idea of a broader opportunity was another theme in the conference, established early by Paul VanderMarck, head of strategy and partner development for RMS, in his keynote address.

“Models make markets,” was the catchphrase of his remarks. He elaborated that the flood market in the United States “is a well known peril, but is nowhere near fully covered because it is one of the most complex perils to model. We have made much more progress in earthquake.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

The Aviation Technology Crutch

In late March, investigators were combing remote Alpine ridges for the wreckage of a Germanwings flight. It turned out the worst had happened, the loss of 150 lives in that crash were the result of a deliberate act.

The European tragedy follows on the heels of several air disasters around Asia over the past year or so, all of which raise questions about the safety of air travel and the risk management efforts of both airlines and insurers.

Oliver Dlugosch, head of aerospace, Swiss Re Corporate Solutions

“Perception may be clouded by recent events, especially the total losses of 2014 and now,” said Oliver Dlugosch, head of aerospace for Swiss Re Corporate Solutions. Reality, however, is not quite so dark. By the numbers, it’s clear that flying is safer than ever, he said.

“We did observe a relatively high frequency of losses last year among Asian airlines,” said Dlugosch, “but some of those were isolated instances, like the shooting down of the flight over Ukraine and the disappearance of the Boeing 777 over the Indian Ocean. Outside of those, we often see multiple factors leading to accidents: the growth of the industry and the shortage of pilots, weather, infrastructure.”

Speaking broadly, Dlugosch stated, “Airplanes are highly automated and that has made aviation safer, there is no dispute about that. We have seen a steady reduction in fatal accidents and that is over a time of increasing passengers and flights. The challenge airlines and risk managers are facing is what to do when the system fails.”

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He cited two examples of experienced captains and able crews who were able to overcome failures. One was Qantas flight 32 in November 2010, when the crew was able to safely land an Airbus A380 with no injuries after the jet lost an engine. Before that was US Airways flight 1549, which suffered bird strikes on takeoff from LaGuardia Airport in New York and ditched in the Hudson River.

“Airplanes are highly automated and that has made aviation safer… . The challenge airlines and risk managers are facing is what to do when the system fails.” — Oliver Dlugosch, head of aerospace, Swiss Re Corporate Solutions

“The Qantas pilot saved a lot of lives. Capt. Sullenberger, who made the water landing, was also a very experienced pilot. He made good decisions early. They also both had a good bit of luck,” Dlugosch said.

Dlugosch stressed that in both cases the pilots were able to fly the stricken aircrafts by hand.

“A few years ago there was a situation with a cargo carrier that suffered a series of losses. Their response was to make their pilots do more hand flying during routine operations, including takeoff and landing. That training enabled the pilots to respond better in emergencies. Their efforts were very successful.”

Obviously, he said, “no airline wants to have a crash,” but added that “there is a role for the insurance and risk management sector” besides just underwriting and rate setting.

“For clients where we have 100 percent line, we give credits for training. Several other insurers and reinsurers do as well. We have also introduced for general aviation flight training that includes upset recovery.”

Most aviation risk professionals agree. They separate the deliberate acts from the accidents, and then focus on the chain of events leading up to the accidents. Causes can be traced to training, maintenance, or operating conditions as well as the broader challenge of a shortage of pilots.

Huge Growth of Aviation in Asia

“There has been huge growth in aviation across Asia,” said Paul Tuhy, chief underwriting officer for global aerospace and a managing director on XL Group’s leadership council.

“There is a shortage of pilots, and many of those serving are young.”

Many are also ex-military, where they were trained under different operating mandates.

“Pilots tend to rely on technology, so when there is a cascade of faults being spit out by the systems, the flight crew may not be able to keep up.”

Tuhy, a pilot himself, cited the Qantas incident as an example of a captain and crew with the experience and perspicacity to turn off the technology and just fly the aircraft. Tuhy noted that the captain, Richard DeCrespigny, wrote a book about the incident, titled QF32, the flight’s call sign. He recommends the book as a case study in what can go right when everything is going wrong.

“We underwrite most major airlines in the world,” said Tuhy. “We look at all factors, from their historical losses, to training programs, to fleet age, and the regulatory regime in their home country.”

He added that there are cultural differences country to country, but that they are hard to condemn across the board.

“In the past there has been some element of strict hierarchy in Asian operations, but that has largely been addressed,” said Tuhy.

“On the plus side, Asian cultures are quick to admit fault. That is very different from the U.S. where litigation is so heavy and all anyone will ever say is, ‘We are investigating …’ .”

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There are several common themes among aviation risk professionals. One that is mentioned often is that technology is a tool, just as is a wrench or even an airplane. It can be used or misused.

“One example is controlled flight into terrain, which is basically flying the plane into a mountain by accident,” said Jim Herbert, chief underwriter of international aviation risk, and global head of aviation major risks at Starr Cos.

Those incidents were common until ground-proximity warning systems were developed. That is the “whoop-whoop, pull up!” alarm that sometimes can be heard being tested as pilots run through their pre-flight checklist. There are similar alarms for oncoming aircraft and other hazards.

“Technology has made airframes much more reliable,” said Herbert.
“And airlines are much more cognizant of loss-control processes. They embed those in training and operations. There really is a lot of good stuff going on.”

He added that while pilots and technology are inherently working together for safety, losses can occur when technology fails and pilots don’t have the manual flying experience to save the situation.

Manual Flight Time

“If you look at losses over the past six or seven years that have been attributed to pilot error,” Herbert noted, “you can see instances where the cockpit crew was not able to react in non-standard situations. That could be because pilots don’t do much actual flying any more.”

Graham Spencer-Brown, aviation practice leader for international airline business at Starr Cos., added, “We talk to our clients a great deal about all these topics. We do not tell them how to run their airline, but we know what their operations are.

“In a routine seven- or eight-hour flight there is very little actual pilot stick time, maybe 20 minutes. So you are dealing with fatigue and boredom, then maybe the need to react in an emergency.”

Spencer-Brown said that airline pilots do train for emergency situations, such as losing an engine on takeoff, at least once a year.
He added that systems manufacturers as well as airlines and pilots are under scrutiny.

“In one incident as I recall the cockpit computers generated something like 80 error messages in the space of just a few minutes, and those messages were not necessarily in order of priority.”

New insight is also coming from the growing use of transponders by which the aircraft transmits operating data to the airline.

“All that goes into a big database,” said Spencer-Brown, “and the airlines and manufacturers study ‘exceedences out of norm.’ Airlines are learning what their crews are actually doing in the cockpit in real life. They are then building that information into their simulator training.”

Gary Gardner, head of aviation claims for North America at Allianz has observed that “in the U.S. there has been a trend toward emergency procedures and safety audits. There are manager meetings to cut the accident rate, and that has been very effective. We review those audits, even the emergency response drills. They know that as technology advances, the training has to keep pace.” Allianz recently published a global aviation study.

As a pilot himself, Gardner can attest that planes essentially fly themselves these days.

“Airlines are more proactive these days in self-auditing, even self-reporting. At least that is the case in the Western world.” — Gary Gardner, head of aviation claims, North America, Allianz

“That can put the pilot into a position not of being dependent on the technology, but not being as practiced at flying. Airlines are aware of that and are changing their training.”

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Gardner is also quick to address the notion of a hierarchical flight deck.

“The current commercial cockpit is much more of a team atmosphere. That didn’t use to be the case, but today the co-pilot and even the third officer, if there is one, are now required to speak up if they see a problem. And captains are trained to be more open to input and insight.”

Overall, Gardner stated, “airlines are more proactive these days in self-auditing, even self-reporting. At least that is the case in the Western world. Other regions of the world are working to catch up.”

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

Not since “Smokey and the Bandit” raced across the nation’s movie screens have truck drivers been so much in the mind of Americans. But the current attention is more like scrutiny than admiration.

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The June 7 crash of a Walmart tractor-trailer on the N.J. Turnpike brought lurid attention to a long-simmering crisis in highway transport: a shortage of experienced and healthy drivers at a time when the demands of high-tech vehicles and tight delivery schedules are increasing. Deteriorating roads and bridges and weather extremes exacerbate the situation.

The risk management dilemma for trucking companies is how they can operate profitably and meet shippers’ demands for service and transparency while meeting increasingly stringent federal and state safety regulations.

The Walmart accident killed comedian James “Jimmy Mack” McNair, and injured comedian Tracy Morgan and others in a six-vehicle crash. The National Transportation Safety Board investigation found the driver was going 65 mph in a 40 mph zone.

VIDEO: MSNBC opinion piece on the Tracy Morgan/Walmart collision.

Fatigue was considered a factor, because the driver was just 30 minutes short of the legal limit of 14 hours in service.

Few in the industry dispute the intention of equipment safety certifications, as well as hours-of-service limits for operators. The challenge is that the demands can often be mutually exclusive in an era when drivers are leaving the business, fewer are entering, and those who remain are getting older and less healthy.

The response from operators; their trade group, the American Trucking Associations (ATA); and regulators has been to gather and analyze ever more performance and safety data. However, industry and regulators differ on what data to gather and how to use it. Congress has weighed in as well.

Most recently, on March 5, the ATA asked regulators to modify its safety and compliance system. Not surprisingly, operators and their advocates in Congress favor self-policing, while federal officials advance government regulation.

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For example, the ATA has asked regulators not to make crash histories and compliance scores public until the government changes its evaluation process.

Also, regulators are reviewing whether they should increase the minimum financial responsibility of motor carriers. A notice of proposed rulemaking was issued late last year, and ATA says it is gathering input from its members.

Driver Shortage

All of these debates center on the core issue of the shortage of drivers overall, and the quality of the ones that remain in the labor force.

In his annual report to the ATA Management Conference last October in San Diego, the organization’s chief economist, Bob Costello stated, “Industry revenue and average revenue per mile are increasing nicely as capacity remains constrained. However, the industry is having a difficult time adding trucks due to the driver shortage.”

Costello added that the driver shortage was “as bad as ever and is expected to get worse in the near term,” as freight volumes continue to grow.

As evidence, Costello reported that turnover, a key indicator, rose 11 percentage points to an annualized rate of 103 percent in the second quarter of 2014. The increase set the rate at its highest point since the third quarter of 2012.

“These turnover rates show that the shortage is acute,” Costello said, “and if the freight economy continues to grow, it will worsen very quickly.”

One reason is that “some new drivers don’t know what they are getting into,” said Jack Scarborough, senior health, safety and environmental consultant at ESIS Inc., the risk management services division of the ACE Group.

“If they last the first few months to a year, they may last a few years, but after that they want to transfer to local work to stay closer to home.”

That drain on the long-distance driver pool adds to the strains of a diminishing overall workforce.

Justin RussoSenior vice president of risk management for Energi

“Drivers are in very high demand, and not a lot of people are going into the industry; we have got the challenge of an aged workforce,” said Justin Russo, senior vice president of risk management for Energi, a national underwriter specializing in the energy sector.

“Out of necessity, trucking firms have to hire drivers just out of school. Schooling can help prospective drivers pass the test,” said Russo, “but does not necessarily teach them how to drive the truck.

“It takes time to accumulate experience. Our prospects, even our insureds go through strict underwriting that includes their hiring and training practices, as well as operations, maintenance, and regulatory compliance.”

Energi has also taken a direct hand in training. It has a fleet of seven simulators built by L3, the same firm that makes them for military training.

“We bring the simulator to the insured’s site,” Russo said, “and based on their loss history, we build driving scenarios around the situations their drivers are most likely to face.”

Technological Changes

Russo detailed other technology, including cab-mounted cameras that look outward, “to help determine liability in case of accidents,” as well as more prosaic tools, such as devices to block cell-phone calls.

“Technology in the cab can certainly help, but it can hurt if it leads to distracted driving,” he said.

The best support for safe operations and high standards for drivers is often underwriting. “Clean operators with few incidents and all their paperwork in order are likely to pay less for insurance than ones with more losses,” said Russo.

Steven Rodriguez, president of third-party P&C claims for York Risk Services, an underwriter, reinsurer, and claims administrator, has more than two decades of experience in trucking.

“Truck technology is great these days; the transponders report location, speed, route, but at the end of the day what matters is the driver,” said Rodriguez.

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“The better companies are thinking ahead on training, records, medical screening. They have a discipline around hiring. But the million-dollar question is that if you have to get a piece of business out the door, what do you do?”

He stressed the risk management aspects of driver quality and availability.

“In the claims we are seeing, the planning is just not there. Good companies and good drivers are in sync with the road, with each other, with the dispatchers on route and road conditions and weather. That is important because even good drivers can be put in bad situations.”

Rodriguez noted that technical data, planning, and driver performance will be used one way or another. It can be used for advance planning, risk management and training, or even in litigation.

“It starts with hiring and keeping the best people,” said Rodriguez, “but if you can’t find enough of them, what do you do? At the very least, you have to have the basic tools of business practice. Not just mission statements and standards, but working business practices.

“I know small operators who use very granular details from their trucks’ transponders to plan their operations and as the basis of retraining on the basics for drivers.”

The segment of the trucking industry that handles energy, chemicals and hazardous materials is already subject to much more stringent regulation than other segments. In general, it is able to charge higher rates because drivers must be highly trained in materials handling and emergency procedures.

Given the specialization of the energy and chemicals sector, opportunities for transfer of best practices to the broader general-freight operations are limited, but do exist.

An April 2014 report by Jeff Melo and Mike Billingsley, risk managers on the group’s health, safety, and environmental team at ESIS, addressed the entire energy sector, from large complex drilling equipment being moved over the road, to local and long-haul transport of oil, chemicals, and wastewater.

It noted that the energy sector is more dependent on trucking than might be commonly understood, given the prevalence of pipelines, railcars and tankers.

“Oil and gas operations continue to grow across the lower 48 states, but that growth could not occur without the fleets of trucks that carry the drilling machinery and other needed equipment and resources,” according to the report.

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That reliance on trucking means that “energy companies and their affiliates confront many exposures related to this high-risk activity, due to driver demand and an inexperienced driver pool across the U.S., increased state and federal regulatory burden and oversight, and drivers operating in unfamiliar rural and urban locations.”